IMF’s Zhu examines impact of changing global relationships on Asian economies

Min Zhu, a deputy managing director at the IMF, today urged Asian countries to build "good macroeconomic foundations" to deal with the "tremendous spillovers" flowing through the global economy.

Zhu, speaking at the London School of Economics, identified a trend towards a new structure of global relationships – one based less on geography and more on a collection of separate economic "clusters" – and the formation of a "global supply chain".

Advanced economies, he said, increasingly share the same policy cycle. Before the financial crisis, Europe was a more sparsely connected region with two focal points – one in the North with the UK at the core, another in the South centred on France and Italy – and has since tightened into one cluster with Germany at the heart.

Another cluster he identified is the "Pan-Asia vertical integrated supply chain". This cluster, Zhu said, has expanded to include South American countries including Brazil, Chile and Peru.

He observed that some countries act as "gatekeepers" and link a small cluster to a larger one. He cited Italy and Austria as examples of European gatekeepers, as they effectively provide other central and eastern European countries with access to the wider trade and finanical markets.

At the centre of all the individual clusters in Zhu's model is a core consisting of the US, UK, China, Germany and France.

He said the transatlantic trade agreement currently being brokered between the EU and the US, dubbed by UK prime minister David Cameron as "the biggest bilateral trade deal in history", would serve to tighten the core, and its connections with other clusters.

Zhu observed that the US has already become much closer to Europe, but this has been predominantly on the financial side and there is "a lot of room" for new trade. Zhu praised the deal as a "good opportunity for the whole world" as "everyone is a part of the supply chain".

Changes in Asia

Alongside the global shift Zhu, a deputy governor at the People's Bank of China between 2009 and 2010, also acknowledged a host of changes in the Asian financial markets.

Before the crisis, advanced economies contributed 80% of the global growth in consumption, while developing economies were responsible for the remaining 20%. Now, it is 50-50. Zhu said this is indicative of a change in the "whole global demand equation".

Zhu characterised Asia as having strong growth and low debt and highlighted the region's expanding financial sector. The Asian banking sector and equities market are demonstrating "huge" growth, he said, although the bond market remains "relatively small".

Moreover, Asia now absorbs around 35% of global capital inflows, although Zhu noted that this was "not necessarily moving along with the local situation" and was determined more by changes in global risk sentiment.

Challenges

To deal with these "tremendous spillovers", Zhu said Asian countries will need "good macroeconomic policy", a "buffer" of fiscal space to exploit in difficult times, and improved international co-operation.

Moreover, he said Asian economies will also have to adapt their growth models. He gave the example of China "moving in the wrong direction" between 2007 and 2011, and highlighted the need for China to continue to move away from investment and towards greater consumption.

Other challenges include the region's infrastructure needs – foremost its high and escalating electricity demands – and its aging population. "The financial sector is needed to maintain the sustainability of people's quality of life," he said.